California defines “doing business” as “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit” (Revenue &Taxation Code § 23101(a)). For tax years that begin on or after January 1, 2011, an entity is also considered to be doing business in California if it meets any of the following criteria:

• It is actively engaging in any transaction for the purpose of financial gain or profit.
• It is organized or commercially domiciled in this state. To be commercially domiciled in this state generally means that California is the principal place from which the trade or business of the entity is directed or managed.
• Its California sales exceed either $500,000 (annually adjusted for inflation) or 25 percent of its total sales. “Sales” include sales made by an agent or independent contractor of the entity.
• Its California real property and tangible personal property exceeds either $50,000 (annually adjusted for inflation) or 25 percent of its total real property and tangible personal property.
• Its California compensation exceeds either $50,000 (annually adjusted for inflation) or 25 percent of the total compensation paid by the entity.

For purposes of these calculations, the sales, property, and payroll of the entity include its pro‑rata or distributive share of any pass‑through entities (i.e., partnerships, LLCs and S corporations).

As far reaching as the above criteria is, the Franchise Tax Board (FTB) goes even further. It takes the position that an LLC organized in a jurisdiction outside California is nevertheless “doing business” here if:

• It is a member of an LLC that does business in California.
• It is a general partner in a partnership that does business in California.
• Any of the LLC’s members, managers, or other agents conducts business in California on behalf of the LLC.

A corporation or LLC “doing business” in California is required to pay at least an $800 franchise tax before it even makes its first sale here if:

• It is incorporated or organized in California.
• It is qualified or registered to do business in California.
• It is doing business in California, whether or not it is incorporated, organized, qualified, or registered under California law.

Furthermore, entities are required to pay the minimum franchise tax whether they are active, inactive, or operating at a loss.

The penalties for failing to comply with filing obligations and tax liabilities in California are not inconsequential. A penalty of $2,000 per taxable year can be imposed if the FTB sends a written demand that a return be filed and the entity fails to file a return within 60 days. In addition, a contract made by an out-of-state entity that has not qualified to do business or does not have a corporate account number from the FTB is voidable by any other party to the contract for the period during which the entity fails to file a tax return.

Conclusion: If you are a corporation or LLC that is generating income in California or maintaining tangible property in California, you are doing business in California. To avoid penalties, you should file a foreign qualification and pay applicable taxes.

(Much of the foregoing is taken from FTB Form 3556 LLC MEO 4-2011.  For more information, please go to www.ftb.ca.gov or https://www.ftb.ca.gov/forms/misc/3556.pdf